What to do when directors deal their shares

You probably noticed the plunge in the shares of high-flying Asos last week. On Thursday, after its second profit warning in two months, the internet fashion retailer fell 31%.

From their March high of £70, shares are now down at £33. Big Asos investors have taken a pounding. But was there a big clue there that all wasn’t hunky dory?

On the way up, Asos directors sold significant amounts of shares. The last major sale, in October at £50, resulted in almost £80m for CEO Nick Robertson.

That’s a significant sum in anyone’s books. Was that a signal for Asos investors? Should they have followed the CEO’s lead, and cashed out?

You can’t have it both ways

Well, I don’t think it’s that simple.

There are plenty of reasons why a director might need to sell shares that tell us nothing about what’s in store for the share price. Divorce and funding a house purchase are popular ones.

The way I see it, share dealing by directors – that means buying and selling – is a good sign in a company. I think it’s best if management owns a meaningful shareholding in the business. It means our mutual interests are aligned.

A necessary part of that is allowing directors to sell their shares if they want to. That’s why there’s nothing wrong when a board – which is incentivised through shares – sells a few of them from time to time. It’s an indicator that they are invested in the company.

I’m much more interested in the overall percentage of the company a director owns than the amount they are buying or selling on a given day.

So it’s not necessarily a bad sign when a director sells. What about when he or she buys?

The stronger signal

While there can be many reasons behind a sale, there’s only one reason to buy shares – to make money!

If a director – or ideally several board members – picks up a decent amount of stock in the market, then it’s likely to be a positive indicator for the shares.

Do be a little wary of the ‘exasperated purchase’, however. This usually happens in the wake of a sharp share price fall. Directors buy to tell the world that a fall has been overcooked.

For example, tech firm Quindell has been under fire from bear raiders recently (see my colleague Bengt’s article on the topic), and the board all bought shares in late April.

When this happens, make sure you ask yourself: are these purchases meaningful in the context of their existing holdings? Are they buying (or selling) enough shares that it signals a drastic change in their outlook?

In Quindell’s case, no. So I doubt they tell us a huge amount. But determining what stake a director has in the company is a great way of finding out their commitment.

Keep it all in context

That’s the real clincher for me, in terms of gauging director commitment: do they still own a good chunk of the company?

In the case of Asos’ CEO Nick Robertson, the answer is yes. His commitment is clear, in that he still owns about 9.4% of the company, worth £260m.

The lesson? By all means look at directors share dealings. They can be a helpful in confirming your view or making you question it. But don’t overreact to news of director dealing, and always look at the wider context.

Day to day, a director might sell or buy. But are they invested in the company’s future?

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